When establishing a startup in Germany, co-founder equity is not simply a matter of deciding ownership percentages.
It is a core governance issue that affects the founders' respective roles, long-term contributions, treatment of shares upon departure, future fundraising, and ultimately an Exit.
This is particularly important for a German GmbH, where share transfers and certain agreements relating to future transfers of shares may be subject to notarization requirements. The way the structure is designed at the outset can therefore have a significant impact on future costs, flexibility, and legal risk.
Why Co-Founder Equity Can Become a Problem
Co-founder departures are relatively common in startup practice. The issue is that a founder leaving the company does not automatically resolve the equity relationship.
If a departing co-founder retains their shares, they may continue to exercise voting rights, request company information, or assert rights in connection with a future Exit. This can create complications for both the remaining team and prospective investors.
For this reason, German and European startups often address co-founder equity and departure scenarios from the outset through a Founders' Agreement and/or Shareholders' Agreement (SHA).
What Is Reverse Vesting?
Reverse vesting is a structure under which a co-founder's equity becomes fully secured only after the founder continues to contribute to the company for an agreed period.
For example, under a four-year vesting structure, if a co-founder leaves before the end of the vesting period, the company or the remaining founders may be given the right to repurchase or recover the founder's unvested shares.
Key terms commonly considered include:
- Vesting period, such as four years
- One-year cliff, under which no equity vests if the founder leaves within the first year
- Monthly or quarterly vesting schedule
- Treatment and repurchase of unvested shares
- Good Leaver / Bad Leaver provisions
- Exercise price for call options
These mechanisms are commonly used to encourage long-term founder commitment while reducing the risk associated with an early departure.
Why Notarization Matters for a German GmbH
One important feature of the German GmbH is the role of notarization.
Unlike in some jurisdictions, not only the transfer of GmbH shares itself, but also certain agreements that create an obligation to transfer shares in the future may be subject to notarization requirements.
Accordingly, reverse vesting arrangements, call options, and similar provisions contained in a Founders' Agreement or SHA should be reviewed at the incorporation stage to determine whether notarization is required.
If this issue is overlooked during the initial structuring process, the company may later face additional notarization costs, contract amendments, or administrative delays in connection with fundraising, founder departures, or restructuring.
Key Matters Co-Founders Should Agree on Before Fundraising
Before incorporating a German startup or raising outside investment, co-founders should generally document at least the following matters:
- Equity ownership of each co-founder
- Ownership structure between a Korean holding company and the German operating company
- Reverse vesting terms and repurchase mechanisms
- Treatment of shares upon a founder's departure
- Good Leaver / Bad Leaver criteria
- Reserved matters and veto rights
- Future incentive pool design, including ESOP or VSOP structures
These issues are particularly important in Korea–Germany cross-border structures.
Where a Korean entity, German GmbH, investment agreement, and Founders' Agreement are all involved, the documents should be designed together so that the ownership, governance, and exit provisions do not conflict with one another.
DECENT Law Firm German Desk
DECENT Law Firm's Global Business Practice Team advises on German market entry, including:
- Formation of German GmbHs
- Founders' Agreements and Shareholders' Agreements
- Reverse vesting structures
- Korea–Germany cross-border ownership structures
- Investment and governance arrangements
Co-founder equity and investment-related risks are generally far easier to manage before incorporation and fundraising than after the structure has already been implemented.